Rockville market shows signs of softening

December 2, 2012

Historically, the Rockville commercial real estate market has been one of the most stable in Montgomery County, given its proximity to Interstate 270 and Rockville Pike. But in recent months, there have been signs of softening.

Apartment inventory grows

Since the third quarter of 2011, the market for high-end (or Class A) high-rise apartments in the Rockville-North Bethesda neighborhood has experienced a 3.4 percent increase in average effective rent, while low-rise apartments have seen a slight 0.2 percent decrease. High-rise rents have been boosted by declining vacancy rates — vacancy fell from 8.5 percent to 6 percent from the third quarter of 2011 to the third quarter of 2012. Meanwhile, the vacancy rate among low-rise projects rose from 3.5 percent to 9.1 percent during that period.

Given these conditions, the 36-month pipeline of new apartments increased to 5,976 units as of third quarter 2012, from 4,654 units one year earlier. Effective rents averaged $1,885 per month for Class A low-rise units and $2,202 for Class A high-rise units. Free rent and other discounts represent about 5.9 percent of face rents in the high-rise sector and 1.2 percent of face rents in the low-rise sector.

The second-tier (or Class B) apartment market saw a 5.2 percent average effective rent increase among garden apartments since third quarter 2011, but the high-rise sector experienced a 6.7 percent decrease. The low vacancy rate of 4.5 percent for garden apartments allowed for rent increases, while a vacancy increase in the high-rise market from 1.9 to 6.7 percent since third quarter 2011 drove effective rents down, with concessions at 2.7 percent of face rents.

The Class A apartment market is likely to remain strong into the early part of next year, given the low vacancy rate for high-rise properties, but the opening of new projects could affect the market in 2013. The Class B high-rise sector also may see further downward pressure on rents due to the expanding Class A sector.

Condo market dormant

The condominium market in Rockville-North Bethesda includes one 228-unit project that is being marketed and which has 33 units left to sell. There is nothing in the development pipeline that could be delivered in the next 36 months.

The neighborhood has experienced a modest decrease in pricing over the past year, with the average effective price edging down to $424 per square foot in the third quarter 2012, from $428 per square foot in the third quarter 2011. Sales volume totaled 19 new condominium units for the 12 months ending in third quarter 2012.

Office market muted

Only 17,000 square feet more space was leased than vacated between January and September of 2012, compared to 112,000 square feet during all of 2011. This compares to the 15-year annual average of 126,000 square feet. Tenants leased about 200,000 square feet through the end of September (including renewals) and the overall vacancy rate fell to 13.2 percent during the third quarter of this year, from 13.5 percent a year earlier.

There have been no new office projects completed in Rockville since 2009, but there are currently two projects under construction, totaling 689,000 square feet. The largest project is JBG ‘s 491,000-square-foot project at 5601 Fishers Lane.

David Parham is senior vice president at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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